Bank, govt feud threatens India’s economy: analysts

MUMBAI, Nov 1. A rift between India’s government and central bank threatens to derail Asia’s third-largest economy as it grapples with a perfect storm of problems including a plummeting rupee and cripplingly high fuel prices, analysts warn.

Prime Minister Narendra Modi’s administration has been accused of trying to influence Reserve Bank of India (RBI) policy — leading to fevered speculation that its chief Urjit Patel is set to quit.

Analysts have urged for an end to the standoff, warning the spat could ripple through the world’s fastest-growing major economy at a precarious time and with an election looming in the spring.

“With the rupee falling, oil prices surging and a host of local credit crunch issues, this is the last straw that can completely break down the working capacity of the RBI and government,” said Dun & Bradstreet India economist Arun Singh.

Indian business dailies have reported that Modi’s government has invoked never-before-used powers to send at least three letters to Patel seeking to impact the central bank’s decision-making.

Some newspapers reported that Patel was preparing to resign over the use of “Section 7” of the RBI Act — which allows the government to instruct the governor on matters of public interest — although the central bank has not commented publicly on whether the measure was used or not.

The government is believed to be unhappy with the bank over a number of issues including interest rates, how to deploy reserves and what to do to respond to India’s sliding rupee.
The rupee has been one of Asia’s worst performing currencies this year, tumbling 14 percent against the dollar as investors withdraw from emerging economies.

The feud entered the public domain on Friday when Patel’s deputy, Viral Acharya, warned in a strongly worded speech that undermining the bank’s independence could be “potentially catastrophic”.

Finance minister Arun Jaitley then hit back at the RBI on Tuesday over a massive multi-billion-dollar bank loan crisis that is hampering India’s corporate sector.

Jaitley accused the central bank of failing to stop indiscriminate lending from 2008 to 2014, saying it had “looked the other way” while banks issued loans that became non-performing assets.

The Indian finance ministry moved to cool the row on Wednesday by releasing a statement admitting to “consultations” with the RBI, but reiterating that it respected the bank’s independence.

– ‘Breaking point’ –
The rift flared up again when economic hardliners from a powerful Hindu nationalist group linked to Modi’s ruling Bharatiya Janata Party (BJP) told Patel to fall in line with the government or quit.

“The Reserve Bank of India Governor should work in sync with the government or otherwise resign,” Swadeshi Jagran Manch’s co-convener, Ashwani Mahajan, told the Press Trust of India news agency Wednesday.

The SJM is the economic arm of the Rashtriya Swayamsevak Sangh (RSS) — a millions-strong Hindu movement which courts influence over ruling party ideology and campaigns for BJP candidates.

Ashutosh Datar, an economist in India’s financial capital Mumbai, said the RSS was “trying to piggyback” off the standoff and hoped “calmer heads prevail and the government backs down”.

Sujan Hajra, an economist at financial firm Anand Rathi, told AFP that the rift between RBI and the government had “reached breaking point”.

“It is not a very happy situation for the markets or the economy,” he said. “The relationship needs to be resolved at the earliest as India’s economy faces challenging times and a general election in the near future.”

The rupee’s slump is widening India’s current account deficit, when the value of imports exceeds that of exports, and threatening to derail economic growth.

The Indian currency is hovering around record lows of 74 after starting the year at 63.67 to the dollar. It is also being squeezed by high crude prices, as India imports most of the its oil it uses.

It is understood the government is pressuring the bank to enact policies to help spur growth — translating into votes ahead of next year’s poll in which Modi will run for a second term.

The government would like the RBI to lower interest rates and free up more of its cash reserves to invest in the economy, boosting growth, analysts say. It is also said to be unhappy with the bank’s handling of defaults by key lender IL&FS, one of India’s biggest shadow banks, which has roiled financial markets and threatened infrastructure investment.